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Answer: 38%
## Explanation To calculate the weight of debt in Company A's capital structure after the acquisition, we need to determine: 1. **Total debt after acquisition** 2. **Total equity after acquisition** 3. **Total capital structure** ### Step 1: Calculate the acquisition cost - Company B's equity value = 125 million shares × $45/share = $5.625 billion - Company B's debt = $4 billion - Total acquisition cost = $5.625 billion + $4 billion = $9.625 billion ### Step 2: Determine financing sources - New shares issued: 50 million × $100/share = $5 billion - New debt raised: $7 billion - Cash on hand: $9.625 billion - $5 billion - $7 billion = -$2.375 billion (this indicates the financing sources exceed the acquisition cost) ### Step 3: Calculate post-acquisition capital structure **Debt:** - Company A's original debt: $22 billion - New debt raised: $7 billion - **Total debt** = $22 billion + $7 billion = $29 billion **Equity:** - Company A's original equity: 500 million shares × $100/share = $50 billion - New shares issued: 50 million × $100/share = $5 billion - **Total equity** = $50 billion + $5 billion = $55 billion ### Step 4: Calculate debt weight - **Total capital** = Debt + Equity = $29 billion + $55 billion = $84 billion - **Debt weight** = $29 billion / $84 billion = 34.52% This is closest to **35%**, which corresponds to option B. **Note:** The calculation shows that the debt weight is approximately 34.52%, which rounds to 35%, making option B the correct answer.
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34 An analyst gathers the following information about two companies:
| Company A | Company B | |
|---|---|---|
| Outstanding debt | $22 billion | $4 billion |
| Number of shares outstanding | 500 million | 125 million |
| Share price | $100 | $45 |
Company A recently announced its intent to acquire Company B. To fund the acquisition, Company A will issue 50 million new shares, raise $7 billion in new debt, and fund the remainder with cash on hand. Company A will also repay Company B's outstanding debt using proceeds from the debt issuance. The book value of Company A's debt is equal to its market value. If the share prices remain unchanged following the acquisition, the weight of debt in Company A's capital structure as a result of the acquisition of Company B is closest to:
A
32%
B
35%
C
38%